'The best thing George Osborne could do is reject the siren voices calling him on to the rocks of more austerity.' Photograph: Olivia Harris/PA

The credit ratings agency Moody's has announced that it will review the UK's top AAA credit rating early in the new year. This is the same Moody's that, back in 2010, was keen to praise the government's austerity drive as a major factor in preserving the UK's good credit. So what has changed in the past two years?

Moody's now appears concerned that, in its words, "the government's efforts to achieve fiscal consolidation and reduce debt are being hampered by weaker than expected economic prospects". This is quite obviously correct, if the economy is not growing strongly then tax revenues are weaker and social security spending higher than they otherwise would have been. A country can't deal with high deficits unless its economy is moving in the right direction. In the past two years, however, the UK has achieved growth of just 0.6% against initial Office for Budget Responsibility projections of 4.6% growth over the same period.

So while it would be wrong to fault Moody's for correctly pointing out that weak growth means the chancellor, George Osborne, is much less likely to hit his debt targets, it is worth asking exactly why it ever thought such a sharp fiscal contraction was a good idea in the first place?

Moody's, in common with the government, appears to have seriously underestimated the impact of spending cuts and tax rises on the wider economy. Its warning is an excellent chance for the chancellor to reassess his plans.

Back in October 2010, as the chancellor was putting the finishing touches to his comprehensive spending review, the IMF published some important, but widely ignored, research. IMF staff looked at the likely impact of spending cuts and found that, in normal times, every 1% of GDP of spending cuts reduced the overall size of the economy by 0.5%, a painful but manageable reduction. However, the fund warned that this (relatively) benign outcome depended on interest rates falling and a country's currency depreciating to boost exports. These two factors would cushion the blow from spending cuts.

In the absence of such factors (and it was always hard to see how UK interest rates could go any lower or sterling could have fallen much further) the IMF found that each 1% of GDP's worth of spending cuts would reduce GDP by 1% – a one to one ratio. This is more painful and less manageable. Furthermore the fund argued that if countries' trading partners were also embarking on austerity at the same time, then the impact would be magnified. In this case each 1% of GDP of spending cuts would potentially reduce GDP by 2%. In such cases austerity risks being self defeating, with cuts to government spending simply leading to lower growth, less tax revenue and a bigger benefits bill.

The problem for Moody's is that it was, and is, part of the problem. It was a combination of ideological politicians and fearmongering ratings agencies that launched the great austerity experiment. Two years on the results are clear – lower growth, higher employment and still-high deficits. The extreme cases are Greece, Portugal and Spain where austerity package after austerity package have been met with the same results. Each time the solution appears to be to try the same thing again.

Moody's has now warned that the government's "most significant policy challenge is balancing the need for fiscal consolidation against the need for economic stimulus". The best thing the chancellor could do is reject the siren voices calling him on to the rocks of more austerity and launch the stimulus we need to get the economy moving. This is a U-turn we could all support.